Shoring up China’s banks

The Chi­nese gov­ern­ment revealed this week that it had com­plet­ed the first phase of a sec­ond re-cap­i­tal­iza­tion of its four biggest state banks in an attempt to prop them up against their expo­sure to about bil­lion of non-per­form­ing loans. The banks bad­ly need the cap­i­tal injections—which are in the form of loans drawn on China’s $400 bil­lion hard cur­ren­cy (for­eign) reserves—to raise their cap­i­tal­iza­tion ratios above the curent 8 per­cent min­i­mum “recommended(link to BIS website)”:http://www.bis.org/bcbs/aboutbcbs.htm by the BIS. The state banks rep­re­sent 60% of lend­ing in Chi­na. Even if they com­ply with the con­di­tions appar­ent­ly attached to the loans, their shaky con­di­tion remains a major risk for the econ­o­my. Accord­ing to “press reports(link to Finan­cial Times story)”:http://www.ft.com/servlet/ContentServer?pagename=FT.com/StoryFT/FullStory&c=StoryFT&cid=1073281063652&p=1012571727102 the bil­lion already divid­ed between the Bank of Chi­na and the Chi­na Con­struc­tion Bank come with sev­er­al con­di­tions relat­ed to gov­er­nance includ­ing cri­te­r­i­al for future per­for­mance by both the banks and senior staff. The Agri­cul­tur­al Bank and the Com­mer­cial Bank of Chi­na are next in line for sim­i­lar cap­i­tal injec­tions. In 1999 the Chi­nese gov­ern­ment put bil­lion into the crum­bling banks and direct­ly reduced some $170 bil­lion in bad loans. Assum­ing that the total injec­tion this time is about $100 bil­lion, it rep­re­sents less than half the offi­cial lev­el of expo­sure to bad debt. The raid on for­eign reserves to fund the trans­fers means that the Chi­nese author­i­ties have weak­ened the case for a Ren­min­bi reval­u­a­tion at the same time as shoring up the bank­ing sec­tor. But they’ve used real mon­ey: will they get val­ue? Even with these mas­sive trans­fers, his­to­ry sug­gests it would take extra­or­di­nary efforts to man­age the banks back to prof­itabil­i­ty and good per­for­mance. Sim­i­lar bail-outs of the Japan­ese banks in the late 1990s didn’t work. Also, giv­en China’s very high rate of growth and the past per­for­mance of the banks, it’s very like­ly that the banks con­tin­ued to use the last funds injec­tions to lend to “risky com­mer­cial ventures(link to NY Times sto­ry on China’s invest­ment bubble)”:http://www.nytimes.com/2004/01/18/business/yourmoney/18china.html. Both the Bank of Chi­na and the Chi­na Com­mer­cial Bank are sched­uled to list on the HongKong stock mar­ket next year.

Resource

An excel­lent overview of (among oth­er things) the risks for the Chi­nese econ­o­my of the under­per­form­ing state sec­tor, and the con­sol­i­da­tion of those risks in the accounts of the state banks, can be found in “Chi­na Embraces the World Market(link to DFAT East Asia Ana­lyt­i­cal Unit)”:http://www.dfat.gov.au/publications/catalogue/china_embraces_world_market.html, ava­iable for down­load from the Aus­tralian Depart­ment of For­eign Affairs and Trade.

Peter Gallagher

Peter Gallagher is student of piano and photography. He was formerly a senior trade official of the Australian government. For some years after leaving government, he consulted to international organizations, governments and business groups on trade and public policy.

He teaches graduate classes at the University of Adelaide on trade research methods and the role of firms in trade and growth and tweets trade (and other) stuff from @pwgallagher